How to Calculate a "Blended Average" for Interest Rates

By
Mortgage and Lending with AmeriFirst Financial Inc, San Diego, CA NMLS 259027

Blended Average aka Weighted Average

 

When determining whether to refinance multiple loans, a "Blended Average" (aka "Weighted Average") between interest rates is a great place to start.  Oftentimes, Homeowners fall in love with their 1st Mortgage, but turn a blind eye to the interest rate on their 2nd mortgage and/or credit cards when considering a debt consolidation mortgage refinance. 

 

 

A simple example is as follows:

  • 1st Mortgage
    • $200,000 balance
    • 4.000% Interest Rate
  • 2nd Mortgage
    • $200,000 balance
    • 8.000% Interest Rate

 

In looking at the above scenario, we can easily calculate that the Blended Average Interest Rate (aka Weighted Average Interest Rate) is actually 6.000%.  Therefore if current market rates were 5.000% to consolidate these 2 mortgages, it would actually be a good idea to at least consider this option (depending on how long the Homeowner intended on keeping these loans, the property, etc.).

 

The challenge from a loan origination perspective however, is helping the Homeowner/Borrower understand that they are not simply replacing a 4.000% rate for a 5.000% rate (which would not be prudent), but instead, replacing a 6.000% blended average interest rate (aka weighted average interest rate) of 6.000% with a 5.000% rate (which makes more sense).

 

Of course, we do not typically get such easy scenarios to analyze, which requires us to understand how to calculate a blended average interest rate (aka weighted average interest rate).  Below is a random scenario involving numbers which are harder to calculate with the naked eye, and the formula in which to use to solve this equation.  Regardless of whether the interest rates shown below are consistent with current rates at the time you read this article, I recommend you focus on the math involved (as interest rates constantly fluctuate).

 

  • 1st Mortgage
    • $180,000 balance
    • 7.250% Interest Rate
  • 2nd Mortgage
    • $39,000 balance
    • 13.750% Interest Rate

 

In looking at the above scenario, it is nearly impossible to calculate the blended average interest rate (aka weighted average interest rate) with the naked eye.  Therefore, I will elaborate the mathematical equation to calculate these averages below:

 

180,000 (1) + 39,000 (2) = 219,000 (A)

39,000 (2) divided by 219,000 = 0.18 (C)

13.750 - 7.250 = 6.500 (B)

6.500 (B) x 0.18 (C) = 1.170

1.170 + 7.250 = 8.420 

Blended Average Interest Rate (aka Weighted Average Interest Rate) = 8.420%

 

As of the time this article is being published (1/25/2019), many Homeowners have taken advantage of low interest rates and locked in a 30 year mortgage within the last few years. While everyone has their own specific timing for locking in their rates (along with differing qualifying parameters at the time the loan was acquired), I can reasonably assign an estimated average interest rate of +/- 4.250% on a 1st mortgage to a significant amount of Homeowners nationwide.  

 

That said, the Prime Index (which most Home Equity Lines of Credit aka HELOC's are tied to) is at 5.500% and predicted to increase this year according to most analysts. Most HELOC's have a margin that is lumped on to the Prime Index before the actual interest rate the Homeowner/Borrower pays is calculated.  For example, a 0.500% margin with today's 5.500% Prime Index would equate to a "fully indexed rate" of 6.000%.  As this number trends higher, anyone carrying a high balance on their HELOC might want to be mindful of the Weighted Average Interest Rate (aka Blended Average Interest Rate) they are paying (especially since many HELOC's are permitted to increase to as much as 18.000% according to the fine print located on most Promissory Notes for the HELOC's which have been acquired in recent years).

 

I am always happy to help Homeowners/Borrowers and/or the professionals who serve these fine folks whenever desired.  The best thing about mathematics is that numbers don't lie (you just have to know how to calculate them)!

Posted by

For more information on topics like this, please feel free to visit www.GordonMortgage.com (an educational resource for Borrowers, Real Estate Agents, and Financial Professionals). Educational content provided by:

 

Jason E. Gordon

Branch Manager | Sr. Mortgage Loan Officer

CMPS, CDLP, CDRE, RCS-D, CDPE, CMHS, CMC, NMLS 259027

 

Gordon Mortgage Group - AmeriFirst Financial Inc.

 

Office: 619-200-8031

Email: jgordon@amerifirst.us

www.GordonMortgage.com

 

11440 W. Bernardo Court, Ste. 300, San Diego, CA 92127

 

What People Are Saying About Jason Gordon

 Not all Mortgage Lenders are alike! Find out what Clients, Real Estate Agents and other Financial & Legal Professionals have to say about Jason Gordon.

 

 

Attention Real Estate Agents!

 Ever heard of a Lender having more "skin in the game" during escrow than a Buyer? Ever wish a Lender would put their money where their mouth is? Learn how the Protect Your Transaction (PYT) program will improve the negotiation leverage for a Buyer, as well as how PYT benefits the Seller & Realtors in this short video.

 

 

 

Recommended Links:

 

To see if you qualify (and to obtain a current market interest rate quote), click here for a secure online loan application form.

 

Gordon Mortgage Group - AmeriFirst Financial

 

Licensed by the Department of Corporations under the California Residential Mortgage Lending Act.

AmeriFirst Financial Inc., 1550 E. McKellips Road, Suite 117, Mesa, AZ 85203 (NMLS #145368) Toll free phone (877) 276-1974. Copyright 2012. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions and limitations may apply. AmeriFirst Financial is required to disclose the following licensing information. Please click here for licensing information. 

 

CLICK HERE TO READ CLIENT & REALTOR TESTIMONIALS

 

Gordon Mortgage Group Credentials 

Jason Gordon Mortgage 
close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Topic:
Mortgage / Finance
Location:
California
Groups:
Realtors®
Mortgage Blogs
Dedicated Bloggers
ORANGE COUNTY, CA REAL ESTATE
CALIFORNIA DREAMING
Tags:
san diego
interest rate
debt consolidation
heloc
mortgage rate
increased rates
blended average
weighted average
increased payments

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Rainmaker
220,682
Deepak Chauhan
Versailles Property - Irvine, CA
Irvine, CA ... the place to be

Now I know you know where money is,

 

I will follow you

Jan 25, 2019 02:07 PM #1
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
484,033

Jason E. Gordon

Sr. Loan Officer, CMPS, CDLP, CDRE, RCS-D, CDPE
Ask me a question
*
*
*
*
Spam prevention

Additional Information